HomeNet by Linksys

Note: Executives are requested to read the case carefully, and summaries the earnings for
HomeNet project in a spreadsheet. Also list the required assumptions.

• Linksys is a division of CISCO systems, a maker of consumer networking hardware.

Linksys is considering the development of a wireless home networking appliance, called
HomeNet that will provide both the hardware and the software necessary to run an
entire home from any internet connection. In addition to the connecting PCs and
Printers, Home Net will control new internet capable stereos, digital video recorder,
heating and air-conditioning units, major appliances, telephone and security systems,
office equipment, and so on.

• Linksys has already conducted an intensive, $3, 00,000 feasibility study to assess the
attractiveness of the new product.

• HomeNet’s target market is upscale residential “smart” homes and home offices. Based
on extensive marketing surveys, the sales forecast for HomeNet is 1,00,000 units per
year. Given the pace of technological change, Linksys expects the product will have a
four year life. It will be sold through high end stereo and electronics stores for a retail
price of $375, with an expected wholesale price of $260.

• Developing the new hardware will be relatively inexpensive, as existing technologies can
be repackaged in a newly designed, home friendly box. Industrial design team will make
the box and packaging aesthetically pleasing to the residential market. Linksys expect
total engineering and design costs to amount to $5 million. Once the design is finalized,
actual production will be outsourced at a total cost (including packaging) of $110 per
unit.

• In addition to the hardware requirements, Linksys must build a new software

application to allow virtual control of home through web. This software development
project requires coordination with each of the web appliance manufacturers and is
expected to take a dedicated team of 50 software engineers a full year to complete. The
cost of a software engineer (including benefits and related costs) is $2, 00,000 per year.

• To verify the compatibility of new consumer-internet-ready appliances with the

HomeNet system as they become available, Linksys must also build a new lab for testing
purposes. The lab will occupy existing facilities but will require $7.5 million of new
equipment.
• The software and hardware design will be completed, and the lab will be operational at
the end of one year. At that time, HomeNet will be ready to ship. Linksys expects to
spend $2.8 million per year on marketing and support for this project.